Market Sizzles as Russia’s Quagmire Continues, China is Warned (March 18 Market Recap)
March 18 Market Recap – Market Sizzles as Russia’s Quagmire Continues, China is Warned
Dow 34,754 or +1810 or +5.5%
Nasdaq 13,893 or +1050 or +8.2%
S&P 4,463 +259 or +6.2%
USD10Y 2.148% +14.4bp or +7.2%
Markets Soar Above Pre-Invasion Levels. A Refocus on Fundamentals?
With this week’s monstrous rally, markets have recovered all the losses they have suffered since Russia’s invasion of Ukraine. On the eve of the invasion, Thursday, February 23, the U.S. major indices stood as follows: DJIA 33,680, Nasdaq 13,511, S&P 4324. While all three indices are still down year to date (Dow –4%, Nasdaq –11%, and S&P –6%), it is possible that market participants have decided that the war in the Ukraine will not create significant damage to the global economy (nor start WWIII). Indeed, crude prices, after spiking as high as $130/bbl have settled in around the $100/bbl level with additional production coming online from U.S. shale producers as well as a possible Iranian nuclear deal that could immediately bring 500k bbl/day onto the market, growing to 1.3 million bbl/day by year end. Further, with the Fed’s roadmap on rate hikes and the reduction of their balance sheet firmly stated, that uncertainty has also been eliminated (for the time being).
Russia Exposed and China Put on Notice
As Russia continues to demonstrate a complete incompetence in war waging as well as adding to their growing list of war crimes, another week has passed with the Ukrainian government intact, functioning, and directing a fierce resistance. Friday, President Biden spoke with Chinese President Xi Jinping and explained the consequences of providing material support to Russia. In fact, as that phone call was being announced on Thursday, there were unconfirmed reports that Russian Foreign Minister Lavrov’s plane was turned around midflight on his way to Beijing and returned to Moscow.
Wonky Bond Talk (but something that bears watching)
As the Fed continues to raise short term rates in response to inflation concerns, longer term rates have held fairly steady resulting in a flattening of the yield curve. In a normal economy, the yield curve is positively sloped with interest rates increasing as the length of time to maturity increases. Currently, the curve is flattening whereby the difference between the yields of the US2YR (1.944%) and the US10YR (2.148%) Treasuries are separated by only 20bp. If the yield curve were to invert, whereby short-term yields exceed those of longer-term yields, a recession is likely to follow within 12-18 months.
All the numbers fell again over the 14-day moving averages although deaths remain stubbornly high. Monitoring the BA.2 variant of Omicron, New York City now reports that 30% of their new cases are of the new, more infectious BA.2 variant. However, it remains to be seen if a spike in hospitalizations or deaths will follow. New data from Britain and Denmark suggest that BA.2 does not cause a higher risk of hospitalization. Further, data from both Britain and Qatar suggest that the existing vaccines, especially with a booster shot, are effective in reducing severe illness against BA.2 What then is happening in Hong Kong? The former British colony is suffering a surge in infections and deaths although the numbers compared to those in the United States are miniscule. Researchers believe that the surge is due to the city’s dense population, a very low vaccination rate especially among nursing home residents and those 70 years of age and older, and the fact that the government’s Zero Covid policy was so successful previously, that there is little enhanced immunity in the community.
A bevy of Fed officials speak next week, and the market will no doubt be paying attention to determine if there’s any growing appetite for a 50bp hike in May vs the stated 25bp planned hike. Nike reports which will give some insight as to the status of the supply chain and health of the consumer. General Mills also reports which will lend insight as to input costs, inflation, and whether they are still able to pass costs onto consumers.
Market Data Points Next Week
- Monday – Atlanta Fed President Bostic and Fed Chair Powell speak. Nike (NKE) reports earnings.
- Tuesday – New York Fed President Williams, San Francisco Fed President Daly, and Cleveland Fed President Mester all speak. Adobe (ADBE) reports earnings.
- Wednesday – San Francisco Fed President Daly speaks again. February New Home Sales. General Mills (GIS) and KB Home (KB) report earnings.
- Thursday – Fed Presidents Kashkari (Minneapolis), Evans (Chicago), Bostic (Atlanta) as well as Fed Governor Waller all speak. Initial Jobless Claims, Feb Durable Goods Orders, March Markit Manufacturing and Services (Flash) PMI.
- Friday – Fed Presidents Williams (New York), Barkin (Richmond) and Fed Governor Waller all speak. March University of Michigan Consumer Sentiment (final).
March 18 Market Recap Trading…
Monday – Dow +1 to 32,945, Nasdaq (262) to 12,581, S&P (31) to 4,173, USD10Y +13.6bp to 2.14%
- Seven of eleven S&P sectors traded in the red today led lower by Energy, Technology, and Communication Services. Financials were the best performer up 1.25%.
- A fresh round of peace talks between Russia and the Ukraine did not produce a ceasefire but Ukrainian President Zelenskyy stated that Ukraine was closer to peace as the war stretched into day eighteen.
- Russia faces a $117 million payment on dollar denominated Eurobonds on Wednesday. While the IMF no longer anticipates a default, several credit rating agencies disagree. The Russians will supposedly attempt to use Chinese Yuan to make the payment which will most likely trigger a default and start a 30-dayd negotiation period.
- National Security Advisor Jake Sullivan met with a Chinese government delegation in Rome, ostensibly to warn them about delivering weapons to Russia or assisting them in blunting Western imposed economic sanctions.
- Russian President Putin signed a decree allowing Russian airlines to continue flying $10 billion of commercial aircraft that are owned by foreign financial firms, in effect nationalizing 515 jets.
Tuesday – Dow +599 to 33,544 Nasdaq +367 to 12,948, S&P +89 to 4,262, USD10Y +2bp to 2.16%
- Markets exploded to the upside today as crude prices continued to fall, with WTI closing at $95/bbl down 7.6%.
- A surprisingly moderate February Producer Price Index came in at +0.8% vs 0.9% expected and vs last month’s +1.2% print. Core CPI which excludes food, energy and trade services rose 0.2% vs 0.6% expected.
- Ten of the eleven S&P sectors traded higher today led Technology, Consumer Discretionary, and Communication Services. Only Energy traded down today, -3.72%.
- China has shut down nonessential business in Shenzhen and Shanghai has reverted to virtual learning as the country faces another Covid outbreak. It is unclear as to why the government is imposing such drastic measures when Shenzhen has only seen 400 cases since February and Shanghai 600. As of Sunday, only 8,531 active cases have been confirmed in all of mainland China and no new deaths have been reported.
Wednesday – Dow +518 to 34,063, Nasdaq +487 to 13,436, S&P +95 to 4,357, USD10Y +2.8bp to 2.188%.
- It was opposite day in the markets today as the Fed raised rates a quarter point and signaled six additional rate hikes. The market initially tanked only to broadly rally hard into the close as market participants decided that combating inflation is a good long-term strategy.
- Nine of eleven S&P sectors traded higher today led by Consumer Discretionary, Technology, and Communication Services. Utilities and Energy were down 0.61% and 2.33% respectively.
- Ukrainian President Zelenskyy addressed the U.S. Congress and again pled for the implementation of a No-Fly Zone as well as for additional combat and humanitarian aid. In response, President Biden announced an additional $800 million in aid to the embattled country bringing the one-week total to $1 billion.
Thursday – Dow +417 to 34,480, Nasdaq +178 to 13,614, S&P +53 to 4,411, USD10Y +0.4bp to 2.192%.
- All eleven S&P sectors traded up today led by Energy, Materials and Consumer Discretionary as markets continued to rebound on another good jobless claims report, certainty with regard to Fed Reserve policy and a gangbusters Philly Fed Report.
- Jobless claims beat expectations at 214,000 claims vs 220,000 claims expected and last week’s slightly revised higher print of 229,000 claims. Continuing claims fell to just over 1.4 million people, a 52-year low.
- March Philadelphia Fed Manufacturing Survey crushed expectations with a 27.4 print vs 15 expected and vs last month’s 16 print.
- Russia made their $117 million interest payment today and avoided default. Their next big test comes in April when a $2 billion payment is due.
Friday – Dow +274 to 34,754, Nasdaq +279 to 13,893, S&P +51 to 4,463, USD10Y (4.4bp) to 2.148%.
- Markets traded up for the fourth consecutive session to finish their best week since November 2020, despite hawkish comments Friday from St. Louis Fed President James Bullard and Fed Governor Christopher Waller.
- Ten of eleven S&P sectors traded higher today led by Technology, Consumer Discretionary, and Communication Services. Only Utilities traded lower today.
- President Biden spoke with Chines President Xi Jingping and explained the consequences of providing material support to Russia.
- February Existing Home Sales missed expectations and were down month over month; 6.02 million vs expectations of 6.13 million vs January’s 6.49 million.
- February Index of Leading Economic Indicators came in as expected, +0.3%.
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